TOKYO, August 7, 2008 (AFP) - Japan's core machinery orders, a key gauge of private-sector capital spending, fell a smaller-than-expected 2.6 percent in June from the previous month, the government said Thursday.

The drop reversed a 10.4 percent rise in May but was better than the market's average forecast for a fall of around 9.5 percent.

Machinery orders placed by the manufacturing sector in June rose 3.9 percent from the previous month but orders by non-manufacturers were down 3.3 percent, the cabinet office said.

The core private-sector machinery orders, which exclude particularly volatile demand from power companies and for ships, are regarded as a leading indicator of corporate capital spending.